Just when the carpet industry thought things couldn't get any worse, they did. While the residential market tanked in 2007 and 2008, the commercial market managed to maintain some momentum. The financial crisis in September 2008 guaranteed that the malaise would spread into contract by 2009, dealing the beleaguered carpet and area rug industry a double blow.

The total carpet and rug industry saw values decline by 21.2 percent between 2008 and 2009, going from $11.84 billion to $9.34 billion, according to Catalina Research and FCW research (Chart 7). Units declined 17.6 percent, dropping from 12.81 billion square feet sold in 2008 to 10.56 billion square feet sold in 2009.

It has been 16 years since the industry saw sales at that level. One analyst speculated that it may be five years or more before the industry gets close to peak levels again. A couple of dynamics are affecting things. One is that house sizes are shrinking, meaning less flooring needed per home. The other dynamic that affects carpet is preference. Prior to the downturn, consumers were showing a clear preference for tile, stone and wood. They shifted back to carpet and vinyl with the recession. But there's good reason to believe that when things come back, those preferences will reemerge.

Looking year to year, it's sometimes easy to overlook the magnitude of the drop in sales and units. Since peaking in 2006 at $14.73 billion in sales, the carpet and rug industry has lost 36.6 percent of its value. In terms of volume, the decline has been steeper: 42.7 percent since peaking in 2005 at 18.43 billion square feet.

The first year of the downturn saw a decrease in value of 10.6 percent. From 2007 to 2008, the market fell another 10 percent. The biggest decline actually came in 2009. Fortunately, most people think 2010 is on track to see some improvement.

The downturn has been one of the most interesting in history because as demand was tanking raw materials supplies — driven by worldwide demands, capacity shifts and unforeseen events — surged repeatedly. Several carpet price increases went through between 2006 and 2009. It's atypical to see price hikes when sales fall in the double digits. That volatility remains in play in 2010 as raw materials prices have again assumed an upward trajectory. Manufacturers instituted a price increase earlier in the year and another in the spring.

In 2009, carpet and area rugs saw their value and volume decline less significantly than some other segments. The category still lost a little ground in overall share, falling from 55 percent in 2008 (based on revised figures) to 54.6 percent. The industry's share of market at the peak sales year of 2006 was 57.4 percent.

In volume, the category still owns a 59.8-percent share of market. That's down 2 percentage points from 2008, but off from the peak volume year of 2005 when it accounted for 65.7 percent of the total market volume.

Raw materials prices saw their most volatile year in 2008 when oil shot up to $147 per barrel in July. Carpet manufacturers increased prices eight times between 2006 and 2008 to try to keep up with the volatility in the chemical market. They were not totally successful. Unit prices rose to their peak of the decade in 2008 at $0.92 per square foot and $8.33 per square yard.

In 2009, things calmed down a little bit and raw materials prices eased during certain times of the year. The consumer's gravitation toward value-oriented products is reflected in a 4-percent drop in unit prices for 2009 to $0.88 per square foot and $7.98 per square yard. Unfortunately, raw materials were again on the rise as 2009 came to a close.

Purchases and end use
According to Catalina Research and FCW research, the carpet and area rug market breaks down into the following major sub segments (Chart 6): residential, which includes new construction and residential replacement — 56.0 percent; commercial, which includes broadloom and modular —24.0 percent; area rugs, which includes bath and scatter as well as room-sized and others — 13.5 percent; and transportation — 6.5 percent.

The residential market is off around 13 percent from 2008. Contract has fallen almost 20 percent year over year. The rug business is also off 20 percent from 2008. Even transportation is down almost 3 percent.

FCW estimates that the area rug market fell from $2.25 billion in 2008 to $1.80 billion in 2009, a drop of 20 percent (see report on page 16). Area rugs, like the total industry, have seen a big push toward the value end of the spectrum across all price points.

Backing out the area rug and transportation number from total sales, broadloom carpet came in at $6.93 billion in 2009. That's down 21 percent from 2008, when total broadloom sales were approximately $8.82 billion. This figure includes modular carpet such as tiles and roll goods.
The residential replacement market was the strongest segment of any in 2009. Existing home sales were hurt by the credit crisis. New construction languished with the recession, a huge existing home inventory and a credit crisis.

The contract market saw significant declines in 2009, down nearly 20 percent over the prior year. Thanks to the financial crisis, the office market was particularly hard hit. Hospitality and retail were also casualties of the recession. Health care, education and institutional markets were not hit quite as hard and have seen their share of market increase (Chart 5).

The carpet industry continues to see changes in its fiber mix (Chart 9). Two things are happening: the drive for greater value is increasing the use of polyester in the industry, especially in lower price points. The other factor is the decline of staple nylon. Its use is down dramatically as mills continue to decommission staple capacity. There are some still using of staple polyester, but that too is on the decline. Again, value drives the equation. Mills can produce carpets made of BCF more efficiently and economically.

Nylon BCF saw its share rise from 43.6 percent in 2008 to 49.3 percent in 2009. Nylon staple fell from 11.6 percent in 2008 to 6.2 percent in 2009. Polypropylene lost a few more points of market share — from 21.1 to 18.2 percent. Polyester staple dropped from 12.5 percent to 10.9 percent, while polyester filament increased from 10.7 percent to 13.3 percent. In 2006, polyester had approximately 11 percent of the market. Last year, its total was close to 25 percent.

Outlook
Catalina Research is predicting that carpet and area rug sales in 2010 will reach $9.70 billion, an increase of approximately 4 percent. Shipments are anticipated to grow from 10.56 billion square feet to almost 10.70 billion, an increase of only around 1 percent.

Raw materials increases during the year resulted in two price hikes so far. While demand remained relatively soft in the first half of the year, the outlook for most carpet and rug suppliers is that the second half would be stronger. If demand strengthens and raw materials continue to go up, there could be another increase by year's end. On the other hand, manufacturers are leery of dampening whatever enthusiasm there is in the marketplace.

There was no great boost coming into 2010 in terms of business on the residential side, but things slowly began to improve over the first half. Retailers reported a pickup in store traffic and slow increases in sales. The consensus is that the bottom had finally been found; there is only one way to go now. Still the threat of a double-dip recession is feared by some.

The commercial market fell hard in 2009. But even as there was some dread prior to NeoCon 2010, the industry's largest commercial tradeshow, that trepidation proved without foundation. If anything, the mood of the show and an uptick in traffic convinced contract participants that they too have found bottom and things are looking up. The contract market probably won't totally rebound until 2011/2012, but most believe it is on the upswing.

If both residential and commercial prove their strength by year's end — and if the new home construction market stages any sort of comeback — 2010 will at least prove the industry is moving in the right direction.